Andy Wong, Pictet AM
Pictet has revised corporate earnings and investment returns lower in developed equities markets and favours US treasuries, dollar-denominated emerging market debt and Australian bonds for yield and capital appreciation.
“Investors must be prepared for volatility and need flexibility to make meaningful and timely changes to their portfolios as well as be specific in implementation,” Andy Wong, senior investment manager for Pictet’s international multi-asset investment team said at a recent media briefing in Hong Kong.
The Swiss asset manager already made a major switch into bonds out of equities in the final quarter of last year as it prepared for an economic slowdown in 2019. Its multi-asset strategy team reduced its equities weighting to 25% from 50% and increased its bond weighting to 50% from 25% between the end of September and the end of December, while retaining a 25% allocation to alternatives and cash.
Wong pointed out that 80% of asset classes ended 2018 in negative territory. Orthodox stock and bond diversification strategies clearly failed, and investors must be smarter and more discriminating.
The firm prefers emerging market equities to developed market equities because they have largely priced in slower economic growth (which is converging globally with the US deceleration). Additionally, many EM companies have taken measures to cushion the impact of weaker conditions in both the US and China.
“After a hiatus in 2018, we see value across the capital structure in China and related emerging market areas,” said Wong.
Among developed market equities, Pictet prefers defensive sectors such as utilities and high-quality companies with prudent balance sheets and clear earnings visibility. For long-term value, Pictet also like secular growth stocks, such as tech disruptors.
Liquidity issues
Pictet believes that most emerging market bonds offer opportunities for solid performance, and that Australian government debt provides a good hedge in case of continued economic disappointment in China.
However, Wong warned against exposure to high leveraged credit (and stocks) due to tightening liquidity and deteriorating balance sheets, especially those that are dependent on growth.
The year ahead will be characterised by persistent trade and geopolitical disruptions, – notably the Sino-US trade dispute, Brexit and Italy’s budget deficit problems – a China slowdown and a widespread “liquidity tightening that threatens financial wealth, upending risk models and correlations,” said Wong.
However, a decade of expansion has been financed by private creditors rather than the banking system, without the excess leverage that exacerbated previous downturns when banks rapidly withdrew funding to protect their capital. Furthermore, the Federal Reserve has recently indicated restraint in the wake of the stock market turmoil in December.
He added that a re-acceleration of the Chinese economy is key to prolong the global economic cycle. Domestic consumption needs to rise. Wong is encouraged by recent moves by the People’s Bank of China to ease monetary conditions (through cuts in banks’ reserve requirement ratios) and by the Central Economic Work Conference’s pro-growth stance that might lead to tax reductions.
“We don’t expect a recession, but we have arrived at an inflection point for growth, monetary policies and investment strategy that points to a weaker economic environment and lower investment returns,” said Wong.
Source: FE 29 December 2017 – 31 December 2018 (in US dollars)
